Are Homeowners Just 'Walking Away'?

May 14, 2008|By Michael A. Hiltzik Los Angeles Times

Bankers and housing market analysts are warning of a chilling new trend in the mortgage world: homeowners voluntarily defaulting on their loans even though they can actually afford to make the payments.

It's known colloquially as "walking away," or more jocularly as "jingle mail," from the sound your house keys supposedly make when you mail them back to your bank.

It's a way of saying Americans are beginning to apply a cold financial calculation to home ownership: When a home's value falls below what is owed on its mortgage, they feel it makes no sense to keep up the payments.

"That is going on, clearly, and there's lots of evidence of that in the market," Don Truslow, senior executive vice president of Wachovia Bank, said in a conference call with investors last month. A few weeks earlier, U.S. Treasury Secretary Henry M. Paulson had waggled a stern finger at homeowners contemplating walking away from affordable mortgages: Do that, and you're no better than a "speculator," he said.

Elsewhere, media reports and Internet postings are rife with stories about the trend and a supposed sea change in American attitudes toward debt.

But there's a major problem with all this talk about the phenomenon of solvent homeowners "walking away": There doesn't appear to be any hard evidence that it's happening.

'HARD TO QUANTIFY'

When pressed for the number of borrowers who could afford their mortgage payments, major banks and lender groups could not produce figures. Nor could the Mortgage Bankers Association, the leading trade group for housing lenders.

Wachovia's Truslow acknowledged during the bank's conference call April 14 that walkaways were "hard to quantify."

A bank spokesman said last week that, "We have heard anecdotally that people are walking away," but his bank had no hard numbers.

Bank of America Chairman and Chief Executive Kenneth Lewis, whose company is acquiring mortgage lender Countrywide Financial Corp., decried "a change in social attitudes toward default" in an interview with The Wall Street Journal in December.

In response to questions from the Los Angeles Times, Bank of America spokesman Terry Francisco said the bank had seen indications that some homeowners were taking pains to keep their credit card accounts current at the expense of their mortgage balances, often by raiding their home equity lines to pay their cards, a reversal of traditional customer priorities.

But he said the bank did not have "firm figures" on how many homeowners were unnecessarily defaulting on their mortgages.

BLAMING HOMEOWNERS

Some people suggest that it might be impossible to find out.

"How would you know what someone's true ability to pay would be?" asked Todd Sinai, an associate professor of real estate at the Wharton School of the University of Pennsylvania. "I'm not sure you could even come up with a definition."

At Fannie Mae, the government-chartered company that owns or guarantees billions of dollars in home mortgages, Senior Vice President Marianne Sullivan conceded that there was growing "folklore" about residential walkaways but said that the phenomenon probably was connected more to investors than people who live in their homes, or "owner-occupants."

Bruce Marks, CEO of Neighborhood Assistance Corp., a Boston-based nonprofit agency that helps strapped homeowners, says flat out that the notion that legions of borrowers are simply deciding not to pay is an "urban myth" that largely reflects the mortgage industry's desire to blame homeowners, rather than their lenders, for the surge in problem loans.

'IRRESPONSIBLE' LOANS

Marks and others assert that mortgage bankers have an incentive to blame the rise in delinquencies and foreclosures on borrowers skipping out on obligations they're financially able to meet, because that diverts attention from the lenders' own role in the mortgage crisis.

"So many of the loans made were irresponsible - for the borrowers and for the lenders," said Kurt Eggert, an expert on predatory lending at Chapman University Law School in Orange County, Calif. "Lenders have an interest in painting themselves as responsible, even caring entities. They want to cast blame for the sub-prime meltdown as much as possible on their borrowers."

It is generally agreed that the real culprit in the meltdown is the proliferation of exotic mortgages that hit borrowers - many with paltry down payments and therefore almost no equity in the home - with huge payment shocks in the early years of the loan.

Experts say some supposed owner-occupants who are "walking away" might be speculators in disguise: buyers who acquired properties as investments to resell for a fast profit. Investors, unlike genuine homeowners, will treat their purchases strictly as economic transactions.